Computational Finance - Elasticity of Demand

Introduction

The study relates to computational finance, which particularly focuses on the elasticity of demand. Elasticity of demand is the ratio of the relative changes the size of the demand for the relative changes in the factor which caused a change in demand. This phenomenon is important to study for any consumer or producer as it determines the factors which guide the demand for goods and services in the market.

Discussion

The elasticity of demand is called flexible if the price elasticity is less than 1. Demand is inelastic when the elasticity takes values ??between -1 and 0. Elasticity of demand is used to measure the force with which the quantity demanded responds to changes in factor determining demand mainly price and income.

Types of Elasticity of Demand

Price Elasticity of Demand

The price elasticity of demand is the change in the demand for goods for the change in the price of goods and services. It is a method of the impact of changes in the prices of a good to change the demand for the good. It is expressed as a percentage which indicates the percentage by which the demand has changed as a result of changes in prices, for case in point, about 10 percent. If large price movements do not cause changes in demand, it can be said that the demand for a given good is inelastic. If the change in prices of good changes proportionally that is in the same range of the demand for the good then it can be said that it is proportionate to the price (Boyes and Melvin, pp. 327 - 544). On the other hand, if the change in demand is greater than the change in prices then it can be said that the demand for a good is elastic with respect to price.

Cross Elasticity of Demand

There is a relationship between the relative change in the demand for good and a change in the relative price of good. Cross elasticity of demand measures the response of demand for one good for the price change of related goods. In addition to this, for positive cross elasticity of demand, it is generally considered that the goods are substitutes. For negative cross elasticity of demand, it usually means that the goods are mutually complementary (Lipsey and Harbury, pp. 212 - 532).

Income Elasticity of Demand

It is the ratio of the change in the size of demand for the particular goods for the change in the income level. It is a method which indicates how a change in the income of the population affected by the size of the demand for the good. It is measured as a percentage that is if the percentage change in demand for a given good by the percentage change in the size of income. It is assumed in income elasticity of demand that the price of the goods and the prices of substitute and complementary goods remain constant. It can be said that the demand in terms of ...